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Different foreign currency in a pile.

Dividend University

Foreign Dividends: Tax Rates, Largest Payers, ADRs and ETFs

Jared Cummans Oct 27, 2014


Investing in foreign dividend stocks is one way to diversify a portfolio. It opens up a whole new area of commerce that can bring excellent returns to an investor’s pockets. However, as with any investment, there are certain risks involved when buying foreign dividend stocks; namely, foreign dividend tax. With a little due diligence, patience and practice, any investor can utilize foreign dividend stocks to add to their investment returns.


Getting Involved in Foreign Stocks


Sometimes investors get so caught up in the domestic stock markets that they totally miss a wonderful opportunity to invest in companies abroad. To some it might seem like a daunting task to put money into an area that is so, for lack of a better term, foreign to them. Though the United States stock markets are the largest in the world, 50% of the world’s stock market investing opportunities are outside of the USA’s borders. That means that by strictly investing domestically an investor is missing half of all trading and investing potential in the world!

But you do not necessarily have to focus on foreign stock exchanges to invest in foreign companies. American Depository Receipts, or ADRs, allow foreign companies access to trade on the NASDAQ, New York Stock Exchange, or another domestic stock market. Investors are able to purchase shares in the form of American Depository Shares, or ADS, in US currency. They are bought and sold like regular shares and still pay dividends. It is an easier and more familiar vehicle to get involved with foreign stock trading.

Another way to get involved in foreign stock trading is actually trading on a specific stock exchange, like the Tokyo Stock Exchange or the London Stock Exchange. By investing abroad, it can limit the potential losses brought about due to American instability. When investors are worried about the U.S. market, putting money in foreign and emerging markets allows investors to diversify their portfolio and hedge against economic troubles domestically and abroad.


There are also possibilities to see tremendous gains in emerging markets across the globe. For example, if an investor were to have invested in South Korea, Hong Kong, Singapore, and/or Taiwan (the Four Asian Tigers) in the 1990s, they could have seen gains in markets that grew at higher than normal rates. While these are unusual circumstances, there are always opportunities all over the world for markets to experience higher growth rates than domestic markets. It may take time and research, but the potential gains are out there if an investor is willing to put in the work [see also The Unofficial Dividend.com Guide To Being An Investor].

By the same token, however, dangers exist in foreign markets.


5 Potential Concerns for Foreign Dividends


So while foreign stocks do bring about a plethora of opportunities, there are definite drawbacks to investing abroad. Here are five potential concerns for foreign dividend stock investing:

1. Foreign Dividend Tax Issues

An investor must be careful when investing in foreign stocks because of certain tax implications. Many countries will tax dividends paid out to foreign investors at a higher rate. So the 7% dividend yield paid out by a company can actually be significantly less if the country deducts a significant amount of withholding taxes. However, some countries, like the U.K., India, and Argentina, do not tax dividends paid to U.S. residents at all. This fact is due to agreements between the U.S. and those countries to not impose dividend taxes on each other.

Such cases are the exception, not the rule, however. Some of the larger withholding tax rates by some countries on dividends paid to U.S. residents are:


Luckily, the IRS has a foreign tax credit that an investor can use to deduct the taxes paid to the foreign government. This is in place to help avoid double taxation of dividend income (i.e. the IRS does not want to tax you on dividends that a foreign government has already taxed you on). However, there is a limit to the amount of foreign tax credit received. No one at Dividend.com is a tax specialist, so the best thing an investor can do when faced with tax issues is talk to an accountant. Learn more about dividend taxation in A Brief History of Dividend Tax Rates.

Avoiding Double Tax Burden

Because owning foreign dividends technically subjects an investor to double taxation, U.S. tax law has put a system in place to ease the burden of excessive taxing. The IRS allows investors to take either a tax credit or tax deduction to avoid the double taxation.

Itemized reductions will reduce taxable income, while an income tax credit can actually be used to pay off tax liabilities. For tax credits, investors must fill out Form 1116 which can get complicated. The tax credit amount that can be claimed depends on the amount of foreign tax due and U.S. tax liability.

If your U.S. tax liability is less than foreign taxes paid, the maximum credit you can claim will be the foreign liability. So if your foreign taxes due are $400 and your U.S. tax liability is $500, the maximum credit that can be claimed is the $400.

However, if your foreign taxes due are $500 and your U.S. tax liability is $400, so your U.S. liability is less than foreign tax paid, you can claim the entire foreign taxes due. In this case that would by $500. Because the $500 is greater than the foreign taxes paid by $100, the remaining $100 can be carried into a previous or future year (up to ten years forward) to lessen tax burdens.

Tax deductions are simpler to calculate, but do not have as marked of an impact on your taxes. For example, if you are in the 30% tax bracket and you take a deduction of $1,000 means you are only lessening your tax burden by $300 (30% of $1,000).

To learn more about this, visit the IRS’ website here to see the requirements.


2. Political, Economic, and Social Instability

While foreign investing can be used to hedge against potential domestic economic issues, it can also be a drawback for the same reasons abroad. Political, economic, and social instability might occur in whatever country an investor might have money in.

Most of the time it is harder to get a pulse on the potential instability a foreign country might face, which is why it is more of a drawback than potential instability domestically. Things like war, acts of terror, civilian unrest, or even natural disasters can dramatically change the economic outlook for a given country, and therefore the companies within its borders. New taxes might be imposed on foreign dividend payments or the companies invested in might be overtaken and nationalized by the country’s government. These factors all have an effect on the returns on investments and must be taken into consideration when determining where investments take place.

3. Dividend Payout Fluctuations and Unusual Schedules

Many times, foreign dividend stocks have unusual dividends that do not mirror the rigid monthly, quarterly, or annual payout schedules that U.S. investors are accustomed to. There are sometimes no set payment amounts — for instance the past four dividend payouts for Unilever (UL ) (a British and Dutch company) have been 29 cents, 32 cents, 30 cents, and 31 cents, respectively. So if an investor is counting on regular income at regular intervals, more research will need to be done to determine what stocks are right for the situation. Find out what you shouldn’t be doing when investing in dividend stocks; read 5 Mistakes To Avoid When Buying Dividend Stocks.


4. Regulatory Differences

Not every country has the amount of regulations and accounting principles that are seen in the United States. Financial disclosure and corporate governance vary greatly abroad. This fact can make it difficult to properly analyze a foreign firm or economy to make sure an investment is being made smartly.

For instance, there are many questions on the validity of China’s own financial statements and thus the companies within its borders. It is hard to tell whether certain Chinese firms are actually operating at a level that matches their financial releases. The time and effort spent to properly analyze and find financial information could be used in a more efficient manner where return on time and investment is greater.

5. Lack of Liquidity

Not all countries have the highly developed market to instantaneously trade securities at the click of a button like we accustomed to with our stock exchanges. This factor can make it difficult to trade in a quick convenient manner. If an investor needed to sell and get out of a market, it might not happen as quickly as one would like. Because of this, an investment timeline and the level of liquidity desired must be considered by investors so there are no surprises if a cash out is needed in a time sensitive manner. There’s always more to learn about dividend investing; check out 5 Common Misconceptions About Dividend Investing.


Investing in Emerging Markets


While balancing your portfolio, you should always ensure there is a fair amount of diversification. One way to diversify your portfolio is by adding international exposure, and there are a number of great options out there. Investing internationally can give investors the opportunity to invest in high potential growth stocks that can exist in emerging markets.

Investing in Foreign Stocks


There are hundreds of foreign dividend paying companies that offer an ADR version of their stock. Whether an investor is seeking a blue chip ADR or a smaller company that is based abroad, ADRs can offer many options for investors. A full list of dividend ADRs can be found here.

What Is an Emerging Market?

Emerging markets are countries that are showing significant growth and industrialization. These countries are not yet developed countries–like the U.S. or Germany–but they show some of the characteristics of developed nations.

Many investors that invest in foreign stocks are attracted to companies based in emerging markets. Although these companies carry greater amount of risk, the growth potential can be much higher than domestic stocks. These regions typically have much higher economic growth as measured by GDP.

BRIC Emerging Markets

The four largest and well known emerging markets are the BRIC countries (Brazil, Russia, India, China). In 2010, this acronym was changed to BRICS to include South Africa. For dividend investors seeking exposure to these regions, there are options in each country to choose from. Below is a list of some of the major corporations from the BRIC countries. Be sure to also check out the country-specific ETF links in each section.


Brazil

As a country, Brazil is known for its agricultural and mining industries. The country has enough oil and gas to be self efficient and has more fresh water available than any other country on earth. There are several multi-billion dollar ADRs available to invest in, as well as country specific ETFs.

Itau Unibanco Holding SA (ITUB )

Itau Unibanco Banco is a financial services company that focuses on commercial, corporate, and investment banking services. The company was founded in 2008 and is the result of a merger between Banco Itau and Unibanco.

Vale SA (VALE )

Vale is a metals and mining company that was founded in 1942. The company created a transit system in Brazil to transport products within the country due to the region’s poor infrastructure. Vale, which is based in Rio de Janeiro, operates in 38 countries.

Banco Bradesco SA (BBD )

Banco Bradesco is a financial services company that focuses on banking products for individuals, mid-sized companies and international organizations. The company was founded in 1988.


Russia

Russia’s advantages include a highly educated population and a large amount of natural resources. Although there are few ADRs for this country, there are many ETF options for investors that are interested in Russian exposure.

Mobile TeleSystems OJSC (MBT )

Mobile TeleSystems is a Moscow-based telecommunications company. The company has a market capitalization of over $18 billion and pays its dividend on an annual basis.


India

India is a nation that serves a large portion of the developed world with its business services, but just 60% of its population is literate and educated. The country as a whole is very poor, but the region is home to several large organizations and outsourced operations from international companies. Below are three of the biggest ADRs available to American investors. There is also a large list of India-focused ETFs.

Tata Motors (TTM )

Tata Motors is an automobile company that manufactures vehicles including cars, trucks, vans, coaches, buses, construction equipment and military vehicles. TTM is the world’s seventh largest automobile company. The company has a market capitalization of $26 billion and pays its dividend on an annual basis.

Infosys Ltd (INFY )

Infosys is a business services and outsourcing firm. The company is the third largest India-based IT company. INFY has a market capitalization of $31 billion and pays a semi-annual dividend.

ICICI Bank Ltd (IBN )

ICICI Bank Ltd is a $27 billion banking company that offers its customers various individual and commercial financial products. The company was founded in 1955 and is based in Mumbai, India.


China

China home to many major industries, and it has a notably strong financial services industry. The country’s economy benefits from its large consumer population and exports. In addition to the many ADRs available from Chinese companies, there are also many ETFs.

PetroChina Company (PTR )

PetroChina is a $231 billion oil and gas company that focuses on petroleum and natural gas activities in China. The company was founded in 1988 and is based in Beijing, China.

China Petroleum & Chemical Corp (SNP )

China Petroleum & Chemical, or Sinopec, is an integrated oil and gas company based in Beijing. On a revenue basis, SNP is the fifth largest company in the world.

CNOOC Ltd (CEO )

CNOOC is an oil and gas company that focuses on the exploration, development, production, and sale of crude oil. CEO is a subsidiary of China National Offshore Oil Corporation.


South Africa

South Africa is the newest member of the BRICS group and is the strongest emerging market in Africa. The automobile industry is one of the biggest and most important industries in South Africa. The country is also directly affected by economic changes in China, as China is a major customer for South African exports. There are a few dividend-paying ADRs that are based in South Africa, as well as several country-focused ETFs.

Sasol Limited (SSL )

Sasol is an oil and gas company that is based in Johannesburg, South Africa. The company operates in 38 countries around the world and has a market capitalization of about $37 billion.


More Emerging Market ADR Options


The Most Reliable Foreign Dividend Stocks


For those looking to diversify into foreign markets, below we have compiled a list of some of the best Foreign Dividend Stocks; the companies profiled here each boast a market capitalization upwards of $10 billion and have also been consistently raising their dividend for at least five years in a row.


Novo Nordisk (NVO )

Based in Denmark, this healthcare company boasts a global reach with its involvement in the discovery, development, and manufacturing of pharmaceuticals. Novo Nordisk has been around since 1989 and is focused on diabetes care and biopharmaceuticals, and more importantly, it has rightfully earned the title of a “blue chip” stock due to its ability to grow its dividend every year since 1997, making for a 17-year old growth track record.

Novartis (NVS )

This Swiss-based multinational pharmaceutical company ranks number one in world-wide drug sales across the healthcare industry. This company has been growing its dividend consistently since 2007, showcasing its ability to weather economic downturns, as evidenced by its 7-year growth track record.

Westpac Banking (WBK )

This Australian financial firm provides a range of services, including everything from retail and business banking to wealth management service. Westpac Banking is one of the few foreign dividend stocks that boasts a history of raising dividends consistently since the depths of the recent financial crisis; this firm has been growing its dividend every year for the last five since 2009.

Ace Limited (ACE )

This Swiss-based insurance provider serves a wide range of customers in more than 170 countries. Ace Limited offers a variety of products and services, including everything from personal accident to life insurance to risk management for businesses. This company has been around since 1985 and it has grown its dividend consistently over the past five years [see also The Dividend.com Guide to Finding an Underpriced Dividend Stocks].

Covidien (COV )

Based in Ireland, this manufacturer of medical devices and supplies became an independently traded company after it was spun off from Tyco International (TYC ) in 2007. Covidien’s products are sold in over 130 countries and the company has been raising its dividend consistently over the past five years.


The Largest Ex-U.S. Dividend Payers


For those coping with a serious case of home-country bias, below we’ve compiled a list of the biggest dividend paying stocks outside of the United States. More specifically, the table below includes foreign dividend payers that have a market capitalization upwards of $100 billion; while market cap isn’t always a great indicator of “stability,” it does add a degree of certainty especially for those who are fearful of investing abroad to begin with.


Below we take a look under the hood of the five biggest ex-U.S. dividend payers:

Royal Dutch Shell (RDS-A )

Headquartered in the Netherlands, this “big oil” company has been in operation since 1907 and today it boasts operations all around the globe. Royal Dutch Shell is involved in nearly every aspect of the oil and gas industry, including: exploration, production, refining, distribution, marketing, petrochemical production, as well as power generation. The company has paid a dividend since August of 2005 and it has raised its distribution for the past two years in a row [see The Complete Visual History of Standard Oil].

PetroChina (PTR )

PetroChina was founded in 1999 and today it’s China’s biggest oil producer; furthermore, PTR is the publicly listed arm of the state-owned China National Petroleum Corporation. Similar to Royal Dutch Shell, this corporate bellwether is involved in nearly every aspect of the oil and gas industry. This company has consistently paid out a semi-annual distribution since 2001, although it doesn’t boast an impressive track record when it comes to consistent dividend growth.

Novartis (NVS )

Based out of Basel, Switzerland, Novartis was founded in 1996 and today it ranks among the top pharmaceutical companies in the world in terms of sales. Novartis is a multinational bellwether with operations ranging from research and development, to manufacturing and marketing for an array of healthcare products; the company is known for producing generic pharmaceuticals, vaccines, as well as diagnostic tools. NVS has paid out an annual distribution since 2007.

China Mobile (CHL )

China Mobile was founded in 1997 and today it’s the world’s largest mobile phone operator in terms of subscribers, with a customer base topping 760 million. Although it is often criticized for this, this telecom juggernaut enjoys a number of protectionist benefits from China’s government seeing as how it’s state-owned. CHL has paid out a semi-annual distribution since 2003 [see also A Dividend Investor’s Guide to Measuring Risk].

HSBC Holdings (HSBC )

Headquartered in London and founded in 1865, HSBC is a multinational banking and finances services powerhouse. The bank actually has its roots in Hong Kong and Shanghai, where its first branches were opened; the name HSBC actually stands for Hongkong and Shanghai Banking Corporation. HSBC has paid out a regular quarterly distribution since 2004.


The Bottom Line


Investing in foreign dividend stocks can help give your portfolio a dose of diversity and open you up to a mass of new options. As always, be sure to do your homework and understand all of the factors that go into buying a foreign stock prior to investing.

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